The Supreme Court yesterday decided to review a lower court decision that federal lawyers say could cost the government more than $1 billion in rent subsidies at low-income public housing.

The case involves a challenge to the government's attempts to keep down costs in one of its largest housing programs. Three years ago, Congress passed a law allowing the government to pay lower annual rent increases to developers of public housing. An appeals court struck down that 1989 law as unconstitutional, saying the legislation interfered with private contracts.

Although the financial consequences of Kemp v. Alpine Ridge Group would fall on the government or developers, tenants could suffer in the dispute if developers feel squeezed and refuse to maintain property or turn it back to the government.

At issue are about 15,000 long-term contracts nationwide between the Department of Housing and Urban Development (HUD) and builders who during the 1970s and early 1980s agreed to construct and operate low-income housing.

The Section 8 program, as it has been known since it was created in 1974, provides housing to millions of low-income tenants by paying rent subsidies. The tenant's rent is based on ability to pay, with the government making up the rest through payments to the developer-owner.

This case involves projects that were newly built and now are under long-term government contracts.

In the early 1980s, HUD began to suspect that its formula for determining annual rent increases was yielding inordinately high rents for certain areas. So HUD scrapped the formula based on housing costs in large regions and instituted a formula based on more localized comparisons.

The latter method yielded lower base rents, and thus, lower subsidies. Project owners sued to have the old formula reinstated.

In that original case on this issue, involving property known as "Rainier View" (in Washington state), the 9th U.S. Circuit Court of Appeals, based in San Francisco, ruled in 1988 that HUD could not abandon the formula designated in contracts with the developers.

Responding to that case, Congress in 1989 amended Section 8 to allow HUD to use the local comparisons to limit annual increases in rent subsidies.

The current case began when developers, led by the Alpine Ridge Group in Juanita, Wash., challenged the constitutionality of that law, arguing that by interfering with their contracts, it violated the Fifth Amendment's protection for property rights.

The 9th Circuit agreed last February.

Arguing on behalf of HUD, Solicitor General Kenneth W. Starr said if the 9th Circuit's ruling stands, the government will have to pay about $50 million to the developers in the case. If the ruling is applied nationwide, Starr said, it could cost more than $1 billion.

The government maintains that the developers never had an unqualified right to rent increases based on the original formula and that no property rights were impaired by the 1989 law.

Warren J. Daheim, a Tacoma, Wash., lawyer who represents Alpine Ridge and about 100 other projects by West Coast developers, said when his clients first contracted with the government they assumed they would get annual rent adjustments "without haggling." If the Supreme Court sides with federal housing officials, he said, "I don't know how any developer would trust the government again."

In other business yesterday, justices ruled unanimously that the Church of Scientology may continue its suit challenging the government's power to demand tape recordings from the church containing lawyer-client conversations.

The dispute began with a 1984 investigation of the tax returns of L. Ron Hubbard, founder of the Church of Scientology. The church said the tapes contained confidential conversations.

The court reinstated Church of Scientology of California v. United States, which had been dismissed by the 9th Circuit as moot because the government has already obtained the tapes.

"Even though it is now too late to prevent . . . the invasion of privacy on the tapes," Justice John Paul Stevens wrote, "a court does have the power to effectuate a partial remedy by ordering the government to destroy or return any and all copies it may have in its possession."

Without comment, the justices let stand a Missouri limit on malpractice lawsuit awards enacted in 1991. The case is Adams v. Children's Mercy Hospital, and only Justice Byron R. White said he would have heard the challenge brought on behalf of a girl who was left brain-damaged and blind during a skin graft operation.

The justices also refused to intervene in a New York state tax-fraud case against the Rev. Al Sharpton, a civil rights activist, who argued that he already had been tried and found innocent of the tax evasion and fraud charges at issue. The case is Sharpton v. Turner.

Finally, the court also said it would review a price dispute between cigarette companies. The Brooke Group Ltd., formerly known as the Liggett Group, claims it lost money because of illegal pricing tactics by a manufacturer of generic cigarettes. The case is Liggett Group v. Brown & Williamson Tobacco Corp.